AMAT FYQ4: Brighter Times in ’13? Share Gains Debated

By Tiernan Ray

Shares of chip equipment vendor Applied Materials (AMAT) are down 29 cents, or 2.8%, at $10.02 after the company yesterday reported better-than-expected fiscal Q4 revenue and earnings per share, but missed analysts’ Q1 expectations, noting that the chip market is being affected by the first decline in PC sales in a decade this year, and noting, too, that the market for tools for solar energy materials remains a tough one.

The report didn’t do much for the equipment group: shares of competitors are down as well today, such as KLA-Tencor (KLAC), down a penny at $43.96, Lam Research (LRCX), down 21 cents, or 0.6%, than $34.41, and Mattson Technology (MTSN), off 3 cents, or almost 5%, at 70 cents.

Applied’s “Silicon Systems Group,” or SSG, the main chip equipment segment of the company, saw a 36% drop in revenue, while the company’s services business rose 8%. The much-smaller display and energy segments saw 24% and 86% increases, respectively.

There is a sense from both bulls and bears that next year will bring brighter times, though the prospect of Applied gaining market share, as it intends to, is more controversial:

James Covello, Goldman Sachs: Reiterates a Buy rating and a $13 price target. “Applied guided 2013 WFE capex (capex for front-end tools only) down 5%-15% yoy, directionally consistent with our forecast for semi capex to be down about 15%. We expect this to help to reset Street estimates (our prior CY13 estimate of $0.60 was 30% below the Street). We are encouraged by the approach that new President Gary Dickerson is helping to implement. Applied is realigning about $200 mn of costs, including a significant reduction in solar, and reinvesting this in areas such as inspection and etch. Our industry discussions suggest Applied has hired several key people in inspection, and we believe it can gain share in SPE as it better focuses resources on targeted areas. We believe restructuring could add 15% to EPS next cycle. Applied’s capital allocation is strong, with its purchase of Varian (a premier SPE asset), an 8% yoy reduction in shares (most in large-cap SPE), and a 3.4% dividend yield.” Covello cut his estimate for this year from $8.19 billion and 60 cents to $7.55 billion and 55 cents.”

Patrick Ho, Stifel Nicolaus: Reiterates a Buy rating and a $15 price target. “We came away encouraged on the company’s renewed focus on its core semi cap equipment business. In our view, management laid out a plan over the next 12-24 months that positions the company to capitalize on the 20nm node and emerging process technologies, like FinFET, 3D NAND, and advanced wafer level packaging. We believe that if the company can execute and deliver new products, these various industry “inflection points” are well positioned for the company in terms of some of its core segments, like epitaxial, deposition, and ion implant. Secondly, we believe that there are renewed opportunities to gain share in markets, like process control and etch, where the company has historically struggled. As the company reinvests resources, people, and product development in the appropriate areas, we believe share gains could transpire as soon as 2013. In particular, we believe these gains will be first evident in the process control market (where we believe Applied can make meaningful inroads in the inspection space).” Ho raised his estimate for this year to $7.19 billion and 53 cents a share from $7.17 billion and 52 cents.

Ben Pang, Caris & Co.: Reiterates an “Average” rating and cuts his price target to $11 from $14.50. “Consensus and our revenue esti- mates were forecasting revenue growth in F1Q13, but AMAT guided revenues flat to down -15%. Although SSG revenues are expected to be flat to up 10% (orders up >25%), the other segments are still mired in a spending slump and are expected see a sequential revenue decline. In particular, AGS revenues will be down -15% to -25% due to low utilization rates […] AMAT highlighted a renewed focus on 300mm market share gain and think they have the potential for share gains in key transistor technologies (PVD, implant, epitaxy, and inspec- tion). We think those share gains could be offset by losses in other segments such as CVD and CMP. We think real share gains may not occur until the 450mm transition.” Pang cut his fiscal 2013 estimates to $8.14 billion in revenue and 67 cents per share from a prior $9.1 billion and 97 cents.

Weston Twigg, Pacific Crest: Reiterates a Sector Perform rating on shares of Applied, writing that the outlook is “grim,” but that will be good for equipment stocks in 2013, “setting up a nice opportunity to buy the stock.” “Applied expects wafer fab equipment (WFE) spending to decline by 5% to 15% in C2013, below our semi capex view of down 4%. We expect demand to rebound sharply in 2H13 as foundries ramp 20 nm processes and as Intel ramps 14 nm. Ap- plied sounded extraordinarily bullish on its prospects at 20 nm, citing a 30% increase in market size and very good product positioning […] Applied’s No. 1 goal is to gain share in WFE, which sounds painfully familiar. Still, the company is ratcheting up R&D efforts, and we think Mr. Dickerson is bringing needed focus.” Twigg cut his estimate for this year to $7.57 billion and 49 cents from a prior $8.25 billion and 67 cents.

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.